TRADE FINANCE
Trade finance represents the financial products and instruments used by importers and exporters to facilitate international trade. It makes it possible and easier for them to conduct business through trade.
Some of the products available for importers and exporters include invoice factoring, buyer’s credit financing, pre-shipment financing, post-shipment financing, storage financing, working capital, and more. You can refer to the Resources section for more information and read about the different types of financial solutions, including requirements, provided by the respective lenders.
1. Pre-Shipment Finance
This includes any finance that an exporter can access before sending goods to an importer.
2. Post-Shipment Finance
This refers to any type of finance that an exporter can use after sending goods to a buyer. If needed, a lender can accelerate payment to the exporter so that the payment is received when the goods are shipped.
3. Import Finance
This is a specialized trade finance solution used to finance the purchase of goods that are exported from one country to another for trade purposes.
4. Storage Finance
This type of finance is for raw materials stored in a client or third-party warehouse that are not yet ready for production, or for finished goods that are not yet ready for shipment.
5. Receivable Finance/Discounting
This is financing against goods shipped to an offtake/buyer through the handling of original shipping documents, with repayment through an acceptable repayment source. The lender secures the arrangement by assigning the receivables and receiving payment directly.
Invoice Factoring
Invoice factoring is a form of alternative financing that involves selling your outstanding invoices to a third-party (factoring company) in exchange for cash upfront. Because it’s not a loan,it does not impact your credit like a traditional bank factoring.
In this transaction, a financial intermediary, usually non-bank, also known as factor, purchases up to 90% of exporter’s receivables and advances cash payment to exporter within 48 hours, rather than for exporter to wait 30,60,90, or 120 days, to collect payment from importer, after the goods have been shipped.
The factor then collects full payment from importer , pays exporter his balance, less factor’s fees. The greatest benefit of this method of payment is that it helps exporter averts cash flow issues, which is quite common in international trade, by making cash available to exporter, money that can use to cover expenses like administrative, staffing, payroll, purchase finished goods for the next export, raw materials etc.
Eligible products include apparel and textiles, food and beverages, seafood, electronics, automotive parts, etc.
Invoice Financing
Invoice financing, also known as invoice discounting or accounts receivables financing, is a financial service in which a provider lends cash to a company up to the value of its unpaid invoices. A supplier can apply for invoice discounting from lenders that accept unpaid invoices (accounts receivables) as proof of money owed. The lender advances money to the supplier in the form of a short-term loan, using the invoices as collateral. The lender typically charges a fee of 1-3%.
On the due date (30, 60, or 90 days), depending on the terms of the agreement between the supplier and the buyer, the supplier collects the payment from the buyer, reimburses the lender, and retains the portion of the invoice value that wasn’t part of the invoice financing agreement, less a service fee.
The Differences Between Invoice Factoring and Invoice Financing
With invoice factoring, you are selling part of your invoices for immediate cash payment from the provider, and the provider collects payment on your behalf on the due date. This is not the case with invoice financing, where you are responsible for collecting payment from the buyer.
Additionally, invoice factoring is not a loan, so no credit check or collateral is required. On the other hand, invoice financing is a loan where your unpaid invoice is used as collateral.
Buyer's Credit Finance
Buyer’s credit is a short-term loan facility extended to an importer by an overseas lender, such as a bank or financial institution, to finance the purchase of capital goods, services, and, in some cases, consumable goods. The importer, to whom the loan is issued, is the buyer of the goods, while the exporter is the seller.
Buyer’s credit is a valuable financing method in international trade as it gives importers access to cheaper funds compared to what may be available locally. At the same time, it helps promote the sale of the exporter’s goods, which may not have been possible if the importer couldn’t access this financing. It’s a win-win situation for both the buyer and seller.
It should be noted that not all countries offer buyer’s credit to foreign buyers. However, if you are importing or planning to import capital equipment from the U.S., you may benefit from this type of financing. You also have the option of purchasing such equipment locally in your own country or leasing it, on the condition that the equipment is manufactured and shipped from the U.S, or, the machinery or equipment is manufactured in the buyer’s country by a manufacturer whose parent company is located in the seller’s country but operates in another country outside of the parent company. For example, a U.S. manufacturing company operating in a foreign country where the buyer is located. The same applies in other cases, such as a Japanese manufacturer operating in South Africa, where the buyer is located and from where the product is being purchased or leased.
Industrial machinery and equipment, such as agricultural, mining and quarrying, oil and gas, building construction, highway construction, and many more,that are manufactured by U.S companies such as Caterpillar, John Deere, AGCO, operating outside the U.S.,can offer loan or lease financing for qualified buyers who purchase or lease the product in his or her country where these companies are operating from. Likewise,Japanese companies like Komatsu, Hitachi Construction Machinery, or a Swedish company, like Volvo Construction Equipment,can also offer financing to qualified buyers in South Africa and some other parts of Africa.
Similarly, if you are purchasing capital equipment and services or, in some cases, consumer goods from countries like Germany, Sweden, Turkey, Italy, Saudi Arabia, or China and need financing, you may be able to qualify for buyer’s credit financing.